Wednesday, June 8, 2011

1a. Seeding initial wealth

He seems to be complaining that — oh no! — there is no central bank to
dole out money in a "proper" fashion. I can think of worse ways
to distribute new currency than rewarding early participants who
took risks.

This is rather the point of a decentralized currency. The people
creating new currency are performing very useful work of making the
network secure.

1b. Mining is unscalable

Big hand-waving assertion with zero evidence. The proofs-of-work
require zero network traffic to generate, and the profitability of
mining will reach a natural equilibrium.

His assertion "It is a nonsensical system for a real currency, not to
mention being obviously unscalable (what happens when everyone tries to
mine bitcoins all day long?)" has already been disproven:

Today's miners, absent the odd crowd of kids and overclockers who own
GPUs, are rapidly becoming very professional operations with datacenters
worth of number crunchers.

Mining ("free money!") is already so difficult that the costs exceed the
income for all but the most powerful ATI GPUs. People who want bitcoins
have taken the obvious route: they buy them on the open market.

2. Deflation is evil

Economics is a social science, and this is an honest and on-going debate
among economists. See e.g.

This is an argument between two theories of economics, not bitcoin. At
best bitcoin could be thought of as a modern experiment in deflation.

But keep in mind that bitcoin is quite different from the foundations of
much deflation study, which often includes an assumption that deflation
is related to the -debt- practices within a currency. Issuance of
bitcoins has nothing to do with debt.

3. Lack of convertability

"because Bitcoin is completely decentralized, no one is completely
invested in the long-term success of the system."

Completely nonsensical. Everybody holding bitcoins is collectively
invested in the success of the system.

For a startup currency that did not exist 24 months ago, the existence
of multiple, liquid, -legal- (registered with govt) bitcoin exchanges
trading USD/EUR/JPY/... is pretty good progress. As more people
become invested in the system, greater convertability appears.

4. Something might go wrong, somewhere, sometime

Amusingly, you can apply the author's same argument to the current state
of affairs in Zimbabwe. Something might go wrong. People might panic
and bitcoin value might plummet.

Sure. But everyone invested in the system has an incentive to fix the
problem.

5. In conclusion

The author does not fully understand all the incentives built into
bitcoins, nor the current ways that bitcoin is scaling up to meet increased demand.

But as a startup currency, like any startup business, standard
disclaimer applies: it is a highly risky experiment, but I would push
back towards any claims of "scam." There are a great many valid economic and technical criticisms of bitcoin; Mr. Cohen managed to miss nearly every one.

My own personal opinion is that the world has plenty of inflationary
currencies, and it's a fun experiment to see how a global,
decentralized currency with predictability behaves. A mix of styles
is always healthy for an ecosystem.